6/29/2006 @ 12:00PM

The MySpace Bubble

If you havent yet directed your Web browser to MySpace.com or a site of its ilk, youre late to a very crowded party. More than 70 million Americans visited a social networking site in April, according to Nielsen
NetRatings
–thats nearly half of the U.S. Internet audience.

These sites, which consist of blank profile canvases that users personalize and then share with friends and strangers, are poised to carry the tech sector through a sustained boom. Theres money and eyeballs coming at these sites from all directions, but because there isnt much money flowing back out again, some wonder whether were in for another bubble.

Both big corporations and tiny startups are trying to capitalize on the social networking trend, but neither camp has demonstrated a surefire business model.

In order to make their community sites pay off big, major Internet companies like
Google
and
Yahoo!
need to strike a profitable balance between subscriptions and advertising. Each one of them has a blogging-style offering, but none of them stand out like News Corp.‘s
MySpace. But even MySpace remains an unproven $580 million investment by for Rupert Murdoch. In order to make his money back quickly, the News Corp. chief executive may have to hook up with Google or Yahoo! for advertising inventory that he can present to MySpaces 51 million monthly visitors.

Tiny companies in the social-networking business face a different business challenge than their established counterparts: Survive the first couple years on venture funding, then sell out to a bigger player. The VCs are game–more than $824 million has been funneled into social networking companies since 2001, according to Dow Jones VentureOne. Of that, $255 million was invested in the first half of 2006 alone.

MySpace worked this system expertly, and now Facebook seems primed for a buyout. After several rounds of funding worth $38.3 million, on June 20 advertising conglomerate
Interpublic Group
purchased a 0.5% stake in the company for an undisclosed amount, but simultaneously bought $10 million worth of ads on the site. Were that an actual equity purchase, Facebook would be worth $2 billion. In reality, the site is valued at far less than that–likely around $600 million.

Upstart or corporate powerhouse alike, the biggest risk to all social-networking players is the flighty, unpredictable behavior of Internet users. Nobody can quite tell how long each affair is expected to last. A very short history tells us that if there isnt enough happening at a site to keep visitors entertained, even a hugely popular site like Friendster–which skyrocketed to more than a million visitors per month during the fall of 2003–can lose steam quickly.

In an attempt to keep visitors hanging around, many of these companies are bringing entertainment, such as videos, music clips, blogs, and instant messaging into their sites. This has created a burgeoning secondary economy of shareable content providers like YouTube, which powers videos, and PhotoBucket, which hosts images.

So far, the visitors are staying put, and more are on the way. The top ten social-networking sites, including MySpace, Blogger and Classmates.com, grew 47 between last April and now, according to Nielsen NetRatings.

But some are already beginning to sense a social-networking site backlash. Internet artist and blogger Sean Bonner has created anti-social networking gag site Isolatr. Catchy Web 2.0 tagline: Helping you find where other people aren’t.